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Who Knew?

With Bacanovic in London, Faneuil faced some twenty hours of questioning by lawyers and high-level compliance officers at Merrill Lynch over a period of a week. Finally, Faneuil changed his story. He told the investigators that he had no knowledge of any client agreement. He also said that Bacanovic had pressured him to confirm the story, thus establishing the possible charge of obstruction of justice charge -- a felony.

On Friday, June 21, Merrill distanced itself from whatever wrongdoing might have occurred by suspending both Bacanovic and Faneuil, citing "factual inconsistencies," and submitting the results of its investigation to Congress, the SEC, and the U.S. Attorney's office in Manhattan.

Bacanovic is said to be devastated by what he sees as Faneuil's betrayal. "Peter has no enemies," says a close friend. "He lives in a world where he is nice to people and people are nice to him."

The two met a few times on the social circuit prior to Faneuil's hiring last spring. Before D.E. Shaw, his résumé thins out a bit: a high-school stint at Bill's House of Pizza. He grew up in Massachusetts (his mother lives in Dover, a wealthy, Waspy Boston suburb, where Faneuil is currently holed up), spent two years at Bennington, then finished at Vassar. He is a close friend of Robert Haskell, who is also an acquaintance of Bacanovic's and formerly a gossip columnist at Women's Wear Daily, where he wrote the "Eye" column. (Shortly before the story broke in the tabloids, the two were on vacation together in Bali). Faneuil, though, has none of the fascination with the Upper East Side A-list that Bacanovic has. He's described as a hard worker, though people who know him say he doesn't take the job home with him. He and Bacanovic were never terribly close. His friends are young people -- without trust funds, for the most part -- in magazines and the arts.

While Bacanovic hasn't exactly shied away from publicity, friends now say that one of his concerns when hiring Faneuil was that employing a friend of a gossip columnist whose job it was to cover Bacanovic's own friends and clients could put him in a tricky position. Faneuil was suspected of leaking Haskell a scoop -- one of Bacanovic's closest friends, socialite Marina Rust, had given birth to a baby girl. ("It's a glamour girl!" the item burbled.)

But Bacanovic was generally satisfied with his assistant's work fielding the barrage of phone calls that come in daily for his boss from friends and clients. It's a punishing job being an assistant for Bacanovic; at times, he has had three people working for him at once. But Faneuil seemed up to handling the job on his own, though he didn't get the same kick out of it as his boss did. "I don't think it was ever really fun," says a friend.

Now, three weeks after the case broke, the government seems determined to bring down the biggest game it can find. Federal prosecutors and congressional investigators hold strong cards, in the form of a sympathetic witness, the baby-faced Doug Faneuil, and a big target, Martha Stewart. They've already begun to see if they can get Bacanovic to turn against Martha as part of a possible plea bargain. The pressure for him to do this will be quite intense, people close to him say, although so far no such deal has been offered.

The facts of a possible insider-trading case against Bacanovic and Stewart are surprisingly murky. It seems unlikely that Bacanovic was told by any of the Waksals that the FDA was going to reject Erbitux. As the indictment shows, Waksal's first concern was getting his family out of the stock at a decent price. Telling Bacanovic, whom he was not personally close to anymore, would likely have hindered that very purpose. Stewart herself was on an airplane and unreachable -- and again, the first priority was his family. When the Waksal sell orders came in, Bacanovic either called Stewart's office himself or had Faneuil call -- he himself never spoke to her until after her trade was complete, say those with a knowledge of the matter -- and warned that the stock would soon sink. When Stewart called in, she spoke with Faneuil. In the excitement of the moment, Faneuil could very well have said to Stewart that the Waksals were selling -- an unethical revelation, perhaps, but not a classic case of insider dealing. He also could have reported that fact in the context of following orders: Peter thinks you should sell because the Waksals are disgorging.

Would that be illegal? "The law in this area is unsettled," says Robert Heim, a former SEC investigator who's now a partner at Meyers & Heim. "But if Faneuil indeed said that, under the current laws that would not be considered insider trading. The information was not obtained from any market participants or company insiders. The prosecution would have to explain that the information passed on to Martha had something to do with the FDA approval."

But at any rate, for Stewart, it was information enough for her to sell. When asked to explain their actions, Bacanovic, who maintains that to this day he has no knowledge of what Faneuil said to Stewart on the phone that morning, said she sold because their target price had been reached.

But, ironically, the most dangerous charges against Stewart and Bacanovic now concern obstruction of justice.

Currently, Bacanovic is hiding out at a friend's house. He's irritated at Martha for not selling when he first told her to. Friends say he refuses to be alone. "It is a supreme irony that someone so cautious, who plays by the rules so much, who is so skillful at not putting a wrong foot forward, gets wound up in something where he didn't do a thing wrong but suddenly is on CNN globally."

His days are packed with long conferences with his lawyer -- some lasting as long as five hours -- fielding telephone calls from his friends, and, of course, busily writing thank-you notes (he is said to rival George Bush père in this crucial social nicety) to his hundreds of well-wishers. Martha Stewart would approve.

A brown station wagon full of photographers has been parked outside of his townhouse for more than a week now (a building where Faneuil has been expected has also been under paparazzi surveillance).

One day, though, he managed to sneak through the cordon, and Brad Gooch ran into him. "He seems sad now," says Gooch. "He used to have this optimistic, peppy view of the world, an innocent relish of the social game. This experience has punctured that optimism."

Waksal's optimism, too, was punctured -- for a while. "In the beginning, all Sam cared about was what people thought," says one friend. "He asked, 'Are people saying I'm a terrible man?' "

Now, however, he's taking a more proactive role. In the Hamptons, says another, "Sam's been out at dinner parties every night. He's always been about keeping up appearances. Even this week, he's acting like nothing's wrong, like it's all under control and he knows something nobody else knows that will make it okay."

Says another friend: "Sam came over to the house. He said to me, 'Why would I have told Aliza to sell, and not told Elana?' "

Talk, however, will only get him so far. "You know, when this is all over," says a friend, "he's not going to have any money, which, in this city, people don't like."